So when does the bubble burst?

Michael Kinsley published an Op-Ed piece in the WaPost over the weekend ref: the ongoing housing boom - and possible signs (and countersigns...) of a coming downturn:

It is obvious to me that today's real estate prices are a speculative bubble that is bound to burst. Of course, this has been obvious to me for about three decades and wrong almost all of that time. Nevertheless. One piece of evidence is the Dinner Party Index. The boom is over when more people are bored by real estate anecdotes ("My next-door neighbor got three times her asking price before she even put it on the market, from a professional mind reader who divined that she was thinking about selling. . . .") than have new ones.

[...]

You've got a bubble when today's prices assume large future increases. If you think prices will be 20 percent higher in a year, you'll be willing to pay 19 percent more today. But if others share that belief, today's price will already be 19 percent higher. Betting on appreciation makes sense only if you are even more optimistic than other buyers. That is hard to be right now.

[...]

Like a roller coaster, a financial bubble has a moment of eerie stillness at the top. Buyers have adjusted, sellers haven't. So sales dry up. When the New York Times spins a surplus of unsold houses as a sign that "the ongoing problem of a lack of houses for sale" has been solved, it means that you had better not count on the Times to tell you when it's time to bail.

[...]

People do foolish things under the impression that they are getting richer because their houses are worth more. They save less, they spend more. Egged on by television commercials, they "consolidate their debts" (i.e., buy a new boat) with a second mortgage. And who really gains from soaring house prices? First-time buyers don't. Nor does anyone who plans ever to trade up. The only beneficiaries are those who are selling their last house, after a lifetime of appreciation. The bigger the house, the bigger the windfall. This is yet another thank-you from America to the so-called Greatest Generation. I'm not sure it's necessary.

Maybe this story holds more relevance to me because we are going to be moving back to the States in the near future - likely to a very expensive real estate market (almost certainly D.C.). For those of you who somehow don't know it, real estate prices in D.C. (and anywhere within probably a 60-mile radius) are...hm...ridiculous actually seems too tame. What does that mean? It means that I'm leery to buy...especially if the market is on the verge of a (much-needed) correction.

It also means that rentals are insanely over-priced. So what's better then? Pouring money down the rental drain or investing in a piece of property that is likely to (rapidly) depreciate over the next 2-5 years? Hm...that's sorta like picking between taking a right cross to the nose or a swift kick to the jimmies, isn't it?

Real Estate